How much should you invest in gold?

201716Mar

A simple household should look at its investment in gold as that portion which is for an extreme emergency.

When I was speaking to a group of women about investing, the inevitable question about gold came up. They seemed quite hesitant to ask about the place of gold in a household’s financial planning decisions, since accumulation of the yellow metal is not considered “modern.”

But they seemed somewhat unwilling to concede that buying gold is not a sound financial decision. Our views about gold are mired in social practices and customs that have persisted over a long time. We should question these views.

When the girl is sent away in marriage to a strange home, she takes her share of the paternal property, legally recognised as streedhan. This includes jewellery and gifts given by her parents, relatives and others on the occasion of her marriage, and she has the right to this property at all times.

The Supreme Court has held that the husband or the in-laws who may be in possession of such property or jewellery, only hold such articles in trust and cannot claim ownership. Streedhan thus doubles as protection for the woman in her marital home.

Over time, women have become economically independent and secured their lives with their profession and income, but the practice of giving gold to the daughter persists, and represents a large portion of gold bought in most households.

What is forgotten is that the legal definition of streedhan includes any movable or immovable property, and gold is only one of the traditional ways in which it is offered.

To include an asset in the financial planning basket of a household, the pertinent question to ask is: How would this asset be used? Investment in gold must pass that test.

Consider a rural household with limited access or knowledge about financial products. A primary problem for this household is the uncertainty of income. If the crop fails, or if rains are delayed, the household faces a cash crunch. Such households typically use gold to create a liquid asset that can be pressed into service.

When there is adequate income, gold is bought; when there is a crunch, gold is pawned to raise money. The loan is repaid and the gold comes back home. Here, gold is a source of funding and a generator of liquidity. Gold loans were included in priority sector lending of banks, due to this widely prevalent practice.

Or consider the financial decisions of a woman who bears disproportionate responsibility in a household. My maid has a drunkard for a husband, who would not hesitate to steal money from her to buy himself liquor. He also thinks he would win the lottery one day, and buys tickets when he can.

She hides the money from him, keeps her cash with her employers, and then uses the money to buy gold. She knows that he will not ask her for her ornaments to buy liquor.

Many women use gold as a simpler way to bring in a financial discipline in the household when they cannot trust their partners to save for the future. They also find it easy to hide gold, deny access to it, or use it when the need arises.

Then I gave my class another situation to ponder about. Assume there was a huge crisis. A war, a riot, or a major disturbance that displaces the household. They have no choice but to leave and settle elsewhere in the world and begin all over again.

What would they take along? Not their fixed deposit receipts or equity shares. But the gold, to be used anywhere in the world. It would be accepted unconditionally, helping them tide over the crisis.

By now, the women were feeling happy that I had almost made their case about the importance of gold. They nodded in agreement when I explained the situations of security, shortfall, suspicion and crisis.

Then I asked them to ponder about what was common to all these situations: Each situation represented a problem; it held a seed of negativity; it represented an extreme and uncommon situation; and it described positions of helplessness or lack of choice.

That is why investment in gold should not be treated as a default first choice. We need gold if we have to face drastic, untoward events.

Most of us have choices that are more flexible, beneficial and positive. We are able to give the girl child education and equal opportunity, and the economic freedom of earnings to secure her future. We do not have to rely on gold to enable that.

We have enough assets to use during times of need, and enjoy stable incomes that take care of our liquidity requirements. We have quality relationships in our marriage, and enjoy the shared responsibilities of the household. We do not see the end of the world as a risk when we go to bed.

That is why our investment in gold should only cover any extreme situation, even if it is low in probability. That is why we should not hold more than 5-10% of our wealth in gold.

What happens when we overdo the allocation to gold? We collect assets that are seldom used. We hold assets that generate no income. We invest in jewellery that comes with steep costs in the form of making charges and damages, and lose a portion of the value every time we transact.

We run the risks that come with holding and protecting a physical asset. There is nothing special about the price of gold moving up; all growth assets behave similarly. Since it represents an asset with high value during a crisis, every time the world is gripped by uncertainty, gold prices move up. And then there are the unscrupulous buyers who want to hide their incomes from the taxman, who are persistent in their demand for gold.

A simple household should look at its investment in gold as that portion which is for an extreme emergency. All other purchases of gold, especially jewellery, should be seen as equivalent to other vanity indulgences such as clothes, bags and perfumes.

It is not often that we find gold and jewellery in a normal household being pawned, sold or used to generate liquidity, fund a sudden requirement for cash, or being bought and sold like other financial assets.

It remains a curse that parents in many parts of the country marry off educated girls capable of generating a long solid string of future income, and think of gold as “security.”

By Uma Shashikant

(The author is Chairperson, Centre for Investment Education and Learning.)